Phanatix, Inc

Essay

Phanatix, Inc. produces a variety of products that carry the logos of teams in the Southern Football League (SFL). The company recently paid the league $85,000 for the rights to market a popular player jersey and immediately began production. The following information is available:
Number of jerseys manufactured: 25,000
Cost of jerseys manufactured: $625,000
Amount of manufacturing costs paid to-date: $410,000
Number of jerseys sold to-date: 0
Estimated future marketing costs: $330,000
Anticipated selling price per jersey: $42
The SFL is about to file a lawsuit to stop jersey sales and is demanding another $50,000 from Phanatix for the manufacturing rights. Conversations with Phanatix's attorneys indicate that the league has a strong case and is likely to win the suit. If this situation arises, Phanatix will be unable to recover any amounts paid to the SFL.
Required:
Phanatix's sales department anticipates very strong demand and a sellout of all jerseys manufactured.
A. Determine the overall profitability of the jersey product line if Phanatix settles the disagreement with the SFL and the anticipated sellout occurs.
B. Should the company pay the additional $50,000 demanded by the league or should the jersey program be dropped? Show computations to support your answer.